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BFCSA: Banking royal commission report will crimp mortgage credit: Citi and UBS

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Banking royal commission report will crimp mortgage credit: Citi and UBS

Australian Financial ReviewSep 20 2018 11:00 PM

James Eyers


Banking analysts are braced for the interim report of the financial services royal commission to prompt a further restriction in housing credit, which could apply further pressure to house prices, after various case studies presented by the inquiry found banks lent more than many borrowers could afford.

Citi banking analyst Brendan Sproules said he's expecting a "blistering review" of lending standards by Commissioner Kenneth Hayne when he delivers his interim report next week, and suggested investors could be underestimating the impact of his recommendations on the sector.

Systemic over-lending

The hearings on consumer lending had exposed "systemic over-lending" and in a comprehensive report published on Thursday, he predicted the inquiry would prompt further tightening of lending and lead to a ramp up of enforcement of lending laws by regulators.

Commissioner Hayne is due to deliver his interim report to the government by the end of next week and it could be publicly released next Friday.

"In our view the most material conclusion of the commission is likely to be that the lending process presently isn't sufficiently responsible," Citi said. "Responses to this issue are likely to involve increased due diligence which will impact the growth and availability of credit further to existing measures."

Other banking analysts agree that banks will further restrict credit in the wake of the report. UBS analysts Jonathan Mott and Rachel Finn said earlier this month: "There is likely to be much more work required for the banks to comply with the royal commission's likely more rigorous interpretation of responsible lending and to improve underwriting standards."

"With the royal commission taking a much more rigorous interpretation of the responsible lending laws and limits on very high debt-to-income lending, credit conditions are expected to tighten further," UBS said, warning the risks of a royal commission-induced "credit crunch" are rising.

Mr Sproules said he expected the interim report to focus on reform measures rather than redress, although the findings could generate "a spate of legal consequences and ongoing litigation".

He said the primary focus would be on banks' systems, processes and norms "which have allowed them to lend too much".

"This is visible across the system, with issues in mortgage broking all the way through to expense verification," he said.

Citi also predicts banks will face financial sanctions over failures exposed in the financial advice hearings, including calls for civil and criminal prosecutions which could lead to big fines and more intrusive oversight by regulators.

While Citi expects the commission will allow brokers to continue to charge commissions, in order to maintain competitive pressure on the banks, it expects a new legal duty for mortgage brokers to act in the best interest of customers to be called for, and for tougher responsible lending requirements for brokers. The report could also call for incentive programs such as National Australia Bank's introducer program to be abolished.

Commissioner Hayne could also ban use of the Household Expenditure Measure (HEM) index, given case studies showed lenders are too reliant on it and this can lead to "adverse customer outcomes as evidenced by more leverage and higher loan balances for broker loans," Mr Sproules said.

Tightening lending standards expected

UBS said earlier this month the interim report would be an "inflection point" for the banking sector. It also expects it will lead to an acceleration of tightening standards. In a new survey of bank customers, UBS found around one-third say their mortgage application had not been entirely accurate.

UBS also found borrowers are finding it more difficult to get a mortgage since the royal commission kicked off (mortgages taking more than four weeks to approve rose from 7 per cent to 12 per cent) and suggested things will get tougher from here.

The investment bank reckons overall borrowing capacity could fall by around 30 per cent, as a result of tighter policies. These could also include the introduction of limits on debt-to-income of six times, changes to negative gearing tax concessions under a Labor government and the migration of customers from interest-only to principal and interest loans.

"While APRA recently stated that 'the heavy lifting on lending standards has largely been done', from a customer's perspective we believe this survey provides compelling evidence that tightening is accelerating, not peaking," Mr Mott said.

UBS said it remains "very cautious" on the banks. "Whether Australia can orchestrate an orderly housing slowdown remains to be seen, and the risks of a credit crunch are rising given the extreme leverage in the Australian household sector," it said.

The big bank CEOs will have around a fortnight to digest the interim report before making a trip to Canberra to answer questions from a parliamentary committee.

Westpac CEO Brian Hartzer and CBA CEO Matt Comyn will appear before the House of Representatives' standing committee on economics on October 11, with ANZ Banking Group CEO Shayne Elliott scheduled to appear on October 12, and National Australia Bank CEO Andrew Thorburn the following week.

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